We have already discussed the tax implications of using a car in your business if you own your own business.
The situations I previously looked at related to a car bought for cash or in terms of a hire purchase agreement.
Today I will focus on the implications of buying a car using a finance lease agreement.
During the course of the lease you will deduct the lease payments you make against your taxable income. You will also have to add back an amount which represents the value of your private use of the car. (In terms of a South African Revenue Services Practice Note this is calculated by taking 1,8 percent of the cash value of the car in the lease agreement, excluding VAT and finance charges).
At the end of the lease you have a number of choices:
* You may let the finance house take the car back;
* You may take over the car and continue to use it in your business;
* You may take over the car and use it privately; or
* You may continue to lease it for a minimal rental.
Each of these decisions will have different implications for tax purposes.
If the finance house simply takes the car back there won't be any tax implications unless it sells the car and pays you a refund.
This refund will be considered by the taxman as a recovery of lease payments and will be taxable in your hands.
You may take over the car without any payment because your lease payments have effectively covered the original cost of the car plus an interest component or the balance on the lease agreement.
If the car has a fair market value that exceeds the amount you pay on termination of the lease the tax legislation considers some of the lease payments to have represented part payment of the purchase price, which should not have been deducted as lease payments.
On this basis whatever part of the lease payments were used to buy the car is taxable. This amount will be included in your taxable income.
The fair market value may be determined by an actual market value or by taking the original cost of the car and reducing it by 20 percent a year.
This value may then be treated as the cost of the car to you and as long as you use the car in your business you may claim a wear and tear (depreciation) allowance against your future taxable income.
If you take over the car and use it privately, you will still recoup an amount up to the fair market value of the car less any further amount paid. However, you will not be able to claim any further amount as wear and tear of the car.
If you continue to pay a minimal rental to the finance house, provided that rental is 10 percent or more a year of the fair market value of the car, you will not have to include in your income an amount of taxable income representing a recovery of previously paid rentals. You will simply deduct the lease payments you make.
It is important to keep these considerations in mind, because when you enter into a finance lease agreement you need to know what the implications will be at the end of the lease in order to plan accordingly.
For example, you may want to ensure that the residual value on the lease will equal the fair market value of the car, so that you don't have to recoup the fair market value later. In doing this, though, you would need to be aware that the ongoing lease rentals will be lower, together with the consequent tax deductions.